Edited version of private advice

Authorisation Number: 1052393941374

Date of advice: 12 May 2025

Ruling

Subject: CGT - subdivision

Question 1

Will the proceeds received from the sale of the lots be assessable as ordinary income, on revenue account, under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of carrying on a business of property development or as a result of an isolated profit-making transaction?

Answer 1

No.

Question 2

Will the proceeds received from the sale of the lots be assessable as statutory income, on capital account as the mere realisation of an asset, under Parts 3-1 and 3-3 of the ITAA 1997?

Answer 2

Yes.

Question 3

If the answer to Question 2 is yes, does the property satisfy the active asset for the purposes of the small business concessions under section 152-35 of the ITAA 1997?

Answer 3

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

You are an individual with full-time employment on a salary.

Less than 15 years ago, you purchased rural farmland in a rural locality. The land was vacant and there were no improvements or dwellings located on the land. The property had 3 titles at the time you acquired it.

The purchase cost was paid by your relative and was treated as a loan. Your relative operated a primary production business on their own land located in the rural locality. Your property adjoined some property owned by your relative and is within close proximity to the other land owned by your relative.

You purchased the property with the intention of using it for farming. You were keen to learn how to run farming activities with the assistance of your relative. You had no intention to subdivide the property at the time of purchase.

Farming activity

You made your land available to your relative for use in their primary production activities without charging any rent. You worked together and in concert with your relative on all aspects of the management of your property and as well as your relative's own property. You have a close family relationship with your relative. Your business relationship is very informal and you provide assistance to each other on an uncommercial basis.

You spent time physically at the property as well as being available to discuss the farm via telephone and other communications, such as at night times. You were involved in the management of the property and assisted your relative with making decisions about the business. You have not been paid by your relative for any of this work.

Subdivision activity

Approximately X years after acquiring the property, you decided to subdivide your property. You approached a local real estate agent who suggested selling the land as multiple lots. There were already X separate titles at the time you purchased the property, so it was a simple process to subdivide the property. The property was never offered to be sold as one lot.

Prior to the subdivision, the estimated market value of the property was approximately $X.

You did not engage a developer or obtain any consultant advice. A local real estate agent was engaged to market the lots, a conveyancer was engaged to register the land titles, and a surveyor was engaged to survey the land.

Surveying of the land was completed. Your relative completed subdivision fencing. Water metres were installed and water piping was laid. No major works were undertaken and no improvements were made on the land during the subdivision activity, aside from grading of a track from the road to one of the lots.

All the activities involved with physically subdividing the land were carried out primarily by your relative. You only had a passive involvement in the subdivision process. Neither you nor your relative had any experience in subdividing property. No subdivision activities were ever carried out on land owned by your relative.

The total expenses incurred from the subdivision activity was $X.

You borrowed funds from your relative to fund the expenses involved with the subdivision. You paid the funds back from the sale proceeds.

The lots were sold one at a time. They were advertised for sale online by a local real estate agent. The sale contracts were entered between MM and MM 20XX.

You did not intend to subdivide the land at the time that you purchased the property. It was always intended to be used for primary production purposes. The rural zoning of the land never changed throughout the subdivision and sale process.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 section 328-130(1)

Reasons for decision

Question 1

Carrying on a business of property development

As a general principle, profits from property subdivision will either be assessable as ordinary income under section 6-5 of the ITAA 1997, or as statutory income under the capital gains tax provisions in Part 3-1 and Part 3-3 of the ITAA 1997. Where the profit has been made as a result of a taxpayer carrying on a business of property development or entering into an isolated commercial transaction, the profit will be assessable as ordinary income.

The question of whether a business is being carried on is a question of fact and degree to be determined on a case-by-case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses.

Some indicators of carrying on a business which the courts have considered to be relevant include:

•                     whether the activity has a significant commercial purpose or character,

•                     whether the taxpayer has more than just an intention to engage in business,

•                     whether there is regularity and repetition of the activity,

•                     whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business,

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit,

•                     the size, scale and permanency of the activity, and

•                     whether the activity is better described as a hobby, a form of recreation, or sporting activity.

Isolated commercial transactions

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are assessable income.

To determine if profits made as a result of an isolated business transaction are assessable income, the most important factors to consider under paragraph 6 of TR 92/3 are whether:

•                     the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and

•                     the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

If a transaction satisfies the above elements, it is generally not a mere realisation of a capital asset.

The factors listed at paragraph 13 of TR 92/3 need to be considered in relation to the property subdivision activities to determine whether they amount to carrying on a business or carrying out a commercial transaction. The factors are:

(a)           the nature of the entity undertaking the operation or transaction,

(b)           the nature and scale of other activities undertaken by the taxpayer,

(c)           the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained,

(d)           the nature, scale and complexity of the operation or transaction,

(e)           the manner in which the operation or transaction was entered into or carried out,

(f)           the nature of any connection between the relevant taxpayer and any other party to the operation or transaction,

(g)           if the transaction involves the acquisition and disposal of property, the nature of that property, and

(h)           the timing of the transaction or the various steps in the transaction.

Application to your circumstance

Applying the indicators from TR 97/11 to your circumstance, it is clear that you are not in the business of developing or selling property. This is because:

(a)           You were the sole owner of the property and subdivided lots in your capacity as an individual. The subdivision activities were primarily carried out by your relative in their capacity as an individual. No developer or third party was engaged to carry out the subdivision transaction.

(b)           Neither you nor your relative have a history or prior experience in property development or subdivision. No other subdivision activities were carried out on any other property owned by you or your relative. The subdivision activity involved minimal works to be able to sell the lots separately.

(c)           The expenses involved were relatively minimal and the magnitude of profit was not substantial in comparison.

(d)           The work required to facilitate the subdivision was minimal and the development was not complex in nature.

(e)           Most of the subdivision work was carried out by your relative. You did not engage a developer or seek any consultant advice. A professional surveyor was engaged to survey the land, and a conveyancer was engaged for registering the new titles. The lots were marketed for sale online by a local real estate agent.

(f)           You have a close family relationship with your relative, who carried out the subdivision activities.

(g)           The land is vacant and no structures exist upon it. You purchased the land with the intention of using it for primary production and it was used for farming when you owned it. The zoning of the land did not change throughout the subdivision or sale process.

(h)           The property was used for primary production activities from acquisition for a number of years. The decision to subdivide was made and the subdivision activities commenced shortly after. The lots were sold approximately 12 months after the decision to subdivide was made.

We do not consider that you were carrying on a business of property development. In considering the factors set out in TR 92/3, it is the Commissioner's view that the subdivision of the property and the disposal of the subdivided blocks was not done in the course of your business or that it was an isolated commercial transaction. The holding of the property for many years for primary production purposes also indicates that the subdivision activity was not business-like or commercial in nature.

The proceeds will therefore not be assessable as ordinary income under section 6-5 of the ITAA 1997.

Question 2

Where profits from property subdivision arise from the mere realisation of a capital asset, the proceeds will be assessable under the capital gains tax provisions in Part 3-1 and Part 3-3 of the ITAA 1997. There are multiple court cases discussing whether property development and subdivision activities are considered to be a mere realisation of a capital asset.

In Statham & Anor v Federal Commissioner of Taxation (1988) 20 ATR 228, the taxpayers owned farmland that was used for a time for raising beef cattle. Due to a number of reasons, the taxpayers decided to subdivide and sell the property, and they obtained the necessary approval from the local council. The actual subdivision work was carried out by the local council, although the owners obtained professional advice from an engineering firm. While the owners provided a bond to the council by way of a bank guarantee, they did not borrow any money. The subdivided land was marketed by local real estate agents. No site office was set up to cater for the sale of lots and no office was set up to conduct the affairs of the owners.

The Commissioner argued that the profits should be income according to ordinary concepts on the basis that while the farm was originally acquired by the owners for domestic purposes, the property was later committed to the business of subdivisional land development.

It was held that it was erroneous to conclude that because the owners decided not to persist with farming the land but instead sold it by means of subdivision, the proceeds of realisation became taxable. The mere realisation of an asset at a profit did not necessarily render the profit taxable. The profit must arise from the carrying on of a business or a profit-making undertaking or scheme. In this case, the manner by which the owner subdivided and sold the land indicated that the owners were not conducting a business or engaging in a profit-making undertaking or scheme. It was therefore a mere realisation of a capital asset.

In Stevenson v Federal Commissioner of Taxation (1991) 22 ATR 56, the taxpayer inherited property in 1953 which was previously used for the family farm. From the 1960's, the taxpayer decided to sell most of the land and engaged a third party to find a buyer. Around this time, the local water authority acquired 26 acres from to taxpayer and used the land to form a lake. The taxpayer decided to take advantage of the lake views and determined the value of the land had increased. In the 1970's, they decided to sell 360 acres to a plantation company but retained 35 acres bordering the lake.

In 1975, a third party on behalf of the taxpayer submitted an application to the local council to rezone the 35 acres of land. The water authority objected to the application and imposed strict conditions relating to water supply and sewerage. The taxpayer found he could not engage a developer willing to pay their price without a rezoning approval as a result of these conditions. From 1977, the taxpayer developed the land by themselves by subdividing the land into residential lots in stages. They organised finance and marketing of the subdivision. The subdivided lots were sold from 1980 to 1986.

It was held that the extent of the activities and the how the taxpayer went about to realise the land amounted to a business. In distinguishing between a mere realisation and carrying on a business, it was relevant that the owner of the asset undertook the planning and management of the development activities.

In Mitri & Ors v Federal Commissioner of Taxation 2023 ATC 10-695, the taxpayers were children of a land developer. The children owned properties for the purpose of operating a farming business. They subsequently subdivided and sold the property under the advice of their father. The option and sale contracts also contained specific references to zoning.

It was the taxpayers' submission that they were unaware of the potential rezoning of the property and that the prospect of rezoning played no part in the purchase decision. Due to the father's long history in purchasing and developing real estate, and the specific references to zoning in the contracts, the taxpayers' submissions were not accepted by the court. It was not accepted that the main purpose of acquisition of any of the properties was to carry out farming. The activity was therefore not a mere realisation of a capital asset.

A recent case is Morton v Commissioner of Taxation [2025] FCA 336. Here, the taxpayer owned farmland which was rezoned as residential. The taxpayer engaged a property developer and sold the subdivided lots as part of a housing estate. The Commissioner argued that the proceeds were income from a business or a profit-making scheme.

It was found that the taxpayer did not engage in a business of developing land or a profit-making scheme. In particular, the taxpayer did not initially acquire the land with a profit motive and continued farming despite the rezoning. The taxpayer had a minimal role in the development process, did not manage the finances for the development project, and went out of their way to minimise risk from the transaction rather than maximising potential profit. The court held that the fact that the taxpayer engaged a property developer did not transform his activities into a business and that the scale of development and lack of repetition did not indicate a business activity. The activity was therefore a mere realisation of a capital asset.

The court cases discussed above demonstrate that consideration must be given to the following factors to determine whether a property subdivision activity is a mere realisation of a capital asset or a profit-making endeavour:

•                     The purpose or intent of the taxpayer when the property was originally acquired,

•                     The conduct of the taxpayer during the development activity, and

•                     The history and experience of the taxpayer.

Application to your circumstance

The Commissioner has considered the factors from the relevant court cases and applied them to your circumstance.

The purpose or intent when the property was originally acquired

In Mitri & Ors v Federal Commissioner of Taxation, the potential for rezoning the property was a feature of the contracts at the time the taxpayers purchased properties. This indicates that there was a prospect of rezoning at the time that the purchase decision was made, and that the transaction was not a mere realisation.

Your intention at the time that you purchased the property was to use it for farming, as the land adjoins property owned by your relative which they use for a primary production business. Your land was used for farming from acquisition, and it was continued to be used for this purpose after the decision was made to subdivide. The zoning of your property did not change at any point in time during the time that you owned the property. The length of time that you held the property and used it for farming activities supports the case that it was always your intention to use the land for farming.

The conduct of the taxpayer during the development activity

Deciding to sell farmland by means of subdivision does not necessarily mean that the proceeds from the sale will be revenue. The profit must arise from carrying on a business or an isolated commercial transaction (Statham & Anor v Federal Commissioner of Taxation).

It is relevant to consider the purpose for acquiring the property, the activities that the taxpayer takes during the development process, and the scale and repetition of the activities (Morton v Commissioner of Taxation). The extent of the subdivision activities and how the taxpayer developed the land is relevant to distinguish a mere realisation from a commercial transaction. Where the owner plans and manages the subdivision activities, such as developing the land themself, selling lots in stages, organising marketing and finance, it is likely that they are carrying on a business or carrying out a commercial transaction (Stevenson v Federal Commissioner of Taxation).

You had a passive involvement in the subdivision activity, as most of it was completed by your relative. Only minimal works were needed to facilitate the subdivision, such as installing fencing and water meters. No improvements were constructed on the land. A local real estate agent was engaged to market the blocks for sale online; you did not actively market them yourself. The development was small in scale and there is a lack of repetition of your subdivision activities. The activities were not planned or managed by you in a business-like way.

The history and experience of the taxpayer

In Mitri & Ors v Federal Commissioner of Taxation, the subdivision activities were carried out under the advice of a relative with experience and history in developing property, which indicated that the transaction was not a mere realisation.

In your case, neither you nor your relative have any prior experience or history in property development or subdivision. The activity was limited to subdividing your property into several lots. No other subdivision activities were conducted by you or your relative.

We consider that the subdivision activity was not a profit-making endeavour as you were not carrying on a business of property development and the activity was not an isolated commercial transaction. This means that your subdivision activity was a mere realisation of a capital asset.

Accordingly, any profit from the disposal of the lots will be accounted for under the capital gains tax provisions in Part 3-1 and Part 3-3 of the ITAA 1997.

Question 3

Active asset test

To access the small business concessions under Division 152 of the ITAA 1997, you must first meet the basic conditions under section 152-10 of the ITAA 1997. In particular, paragraph 152-10(1)(d) of the ITAA 1997 states that the CGT asset must satisfy the active asset test.

The active asset test is contained in section 152-35 of the ITAA 1997. The test is satisfied where an asset is owned for less than 15 years, and the asset was an active asset for a total of at least half the time in the test period. The test period begins when the asset was acquired and ends at the CGT event.

Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if it is owned and used, or held ready for use, by you, your affiliate, or another entity that is connected with you in the course of carrying on a business that is carried on, whether alone or in partnership.

Affiliates

The meaning of affiliate is set out under subsection 328-130(1) of the ITAA 1997. An individual is an affiliate of yours if they act, or could be reasonably expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of their business.

Whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, depends on the circumstances of the case. Relevant factors include:

•                     the existence of a close family relationship between the parties,

•                     the lack of any formal agreement or formal relationship between the parties setting out how the parties are to act in relation to each other,

•                     the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, and

•                     the actions of the parties.

Application to your circumstance

Affiliates

You have a close family relationship with your relative. You made your land available to your relative for use in their primary production activities without charging any rent. Your business relationship is very informal and you provide assistance to each other on an uncommercial basis.

You worked together with your relative on all aspects of the management of your land and as well as your relative's own property. You were involved in the management of the farming activities on your property and assisted your relative with making decisions about the business.

We consider that your relative is your affiliate. This because a close family relationship exists, the business depended on the use of the property without consideration, the absence of formal arrangements, and the consultation regarding business decisions.

Active asset test

You acquired the property less than 15 years ago. The land was used as part of your relative's primary production business for over half the ownership period. The property was then subdivided, with each lot being sold separately.

The property therefore meets the active asset test.

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